Note:  You should also read about taxonomies (Danziger: 473-75); Danziger uses taxonomies a lot so you will find it useful to know what they are.

Points to ponder

• It should not seem as strange as it might to talk about economics in an introduction to politics course because the division of the social sciences is a relatively modern phenomenon
  • The American Political Science Association, the American Economics Association, and the American Sociological Association were formed, and then spawned separate disciplines, only in the 1880s and 1890s
  • Adam Smith, whose Wealth of Nations (1776) made the case for laissez faire capitalism in place of mercantilism which was the policy of state (actually monarchical) steering of the economy, was known not as an economist but as a moral philosopher
• Politics and economics are necessarily interrelated for many reasons including
  • Economic activity takes place within a legal structure involving such things as property rights and contracts, and that structure of laws is set by the government through a political process
  • To the extent that class or region are lines of cleavage in a given political system, issues of income distribution, social welfare, and economic policy are likely to be particularly contentious issues
  • There is considerable evidence from many political systems that support for political authorities (the people running the government) and the regime (the constitutional system, or the way the government as a whole is run) is affected by the economic performance of the state
    • The massive inflation in Germany undermined the Weimar regime of the 1920s and contributed to the growing support for Hitler’s NDSAP
    • The collapse of the Soviet Union and the discrediting of the ruling Communist Party of the Soviet Union can be attributed in large part to the inefficiencies of the planned economy
      • The dislocations and pain of the transition to a market economy under Boris Yeltsin in the 1990s after the fall of Communism made many Soviet citizens, in particular older ones, long for the return of the Communist Party
    • Jimmy Carter’s loss of the presidency in 1990 was, in good measure, due to the twin problems of unemployment and high inflation, and George H.W. Bush was defeated in his bid for reelection by high unemployment (Clinton’s campaign chief had a note above his desk, “It’s the economy, stupid,” to keep a focus on the economy as the key to winning the White House)
  • Politics necessarily plays a role in a global economy, where all economic actors are located in one state or another: government policies promote or limit international trade, governments try to promote export markets for their goods and improve access to natural resources, while at the same time doing what they can to protect their own domestic economic forces
    • anticipating our discussion in a few days of international relations, and without worrying the details too much, consider the story ["Effects of Opal deal" NYT 1 Jun 09] about the sale of Opel and how it brings together issues of government management of the economy, domestic politics and international relations
• To what extent should government play a role in the economy?
  • All governments have some role in the economy, if only to establish property rights and to set up a legal mechanism for exchanges and contracts
  • Government may properly intervene, even according to supporters of a market economy, if there is market failure, that is, if the market economy is not performing the way market theory says it should operate (Stokey & Zeckhauser 1978)
    • Market theory says that there should be perfect competition, but if there are monopolies, the government might intervene to break them up
    • Market theory assumes that there is complete information for buyers and sellers, but if there are information gaps (lack of truth in advertising or consumers lack information about, say, the safety and efficacy of pharmaceuticals) the government might intervene
    • Where there are externalities—situations in which third parties are impacted by exchanges between buyer and seller—the government might intervene
      • This is the case of negative externalities, where for example a detergent manufacturer sells to consumers but disposes of his industrial waste by dumping it in the river, harming the property of a third person
      • There are also positive externalities, as for example when I pay a doctor for a flu shot—not only do the doctor and I benefit from this exchange, but my immunity may reduce your third-party risks of catching the flu
    • And then there is the problem of public goods, goods which can only be consumed in common because they are characterized by non-excludability (like a missile defense which you might install over your house but from which I will benefit even though I didn’t pay) or non-rivalry (like a sidewalk in which your use of the resource is not significantly degraded by my use of it, making it pointless to try to charge those who walk on it); because of non-excludability and non-rivalry, it makes no sense for any individual to buy a sidewalk or missile defense system, which means no one will buy these things which are truly valuable to all, and no one will have them
  • In addition, because market economies naturally tend to experience periods of excessive growth and inflation at times, and at other times rising unemployment and low growth, there is a general consensus that government has a role to play in stabilizing the economy by use of fiscal policy (changes in taxing and spending) or by manipulating the money supply (monetary policy)
  • Somewhat less consensus exists for the idea that government might intervene to prohibit demerit goods (goods for which a competitive market exists but are nonetheless regarded as “bad,” such as marijuana) or, on the other hand, promote merit goods,  goods which people should have but don’t want to purchase such as retirement insurance (Social Security) or fluoridated water (MacRae and Wilde 1979: 187-88)
  • Finally, and even less consensually, governments may intervene to alter the distribution of income, reversing the shares of wealth—often, but not necessarily, from upper income groups to those with less—that otherwise result from the free play of market forces
• Governments can intervene in the market by a number of different mechanisms
  • Government provision of a good through a government agency or government corporation (the US Postal Service, public schools and colleges, nationalized industries for the production of automobiles are examples, as are social security programs)
  • Regulations which require or prohibit market behavior which would otherwise occur (things such as environmental regulations, requirements that automobile owners have insurance, and compulsory schooling)
  • Incentives to encourage or discourage behaviors (tax reductions for those who buy hybrid automobiles, mortgage interest deductions, and so forth)
  • Symbolic manipulation, in which propaganda is used to encourage or discourage certain behaviors (such as anti-drug campaigns and, of course, our friend “Woodsy Owl,” who reminds you, “Give a hoot, don’t pollute”)
• It is commonplace to contrast communism with democracy but this is not a very good practice
  • As we shall see, democracy, rule by the people where government is controlled by its citizens, is an alternative to authoritarianism where rule, power over the state and its citizens, is exercised by one person (or, more realistically, by a small group of people)
    • While market economies tend to promote or support democracy, something the Chinese are about to learn (though there is a report ["Russia's leaders see China" NYT 17 Oct 09] that Russia's Putin thinks the Chinese may be on to something), there is no analytical reason why democracy cannot coexist with a mixed or even command economy (and, indeed, many European states are social democracies—fully democratic but with very substantial government control over the economy, especially in the provision of social services [cross-national comparisons are tricky because of variations in reporting practices, but OECD data on member states, all democratic, give a sense of the variations in the role of government in the economy
  • Communism, such as used to be found in the Soviet Union, brings to mind an authoritarian system with a command economy, a fair enough characterization but one which conflates two different dimensions—control over the means of production and popular control over government
  • If you think about it, we are back to dividing political economy into two pieces, the concentration of political power and the concentration of economic power; thus: 

Questions to consider:

• Should the government subsidize with grants or tax incentives the building of, or improvements to, grocery stores?
• As a report on birth rates and social norms about leisure v work illustrates ["Europeans see crisis" NYT 22 May 10], sociological issues play into political economy. What sorts of political conflicts can you imagine as a result?

Purely optional, but there was a NOW piece on the role of ratings agencies in the 2009 financial collapse, highlighting the critical but often overlooked role of Moody’s and others in our economic system.  Also, if you like, the New York Times has been running a series of reports on the background of the “meltdown,” under the heading of the “Reckoning,” that you might find interesting.

Assignment

We all know that we, in the United States, live in a capitalist (aka private enterprise, market) system.  In an on-line discussion, for which you will be assigned an exercise grade, and remembering my expectations for such exercises, let's put our heads together to identify the ways in which that statement, that the US is a free enterprise system, is at least a bit misleading.  How does the government affect the US economy?  A special Discussion Board forum--"Yo, Comrade"-- has been created for this assignment.  If you want to earn points, after reading the chapter and absorbing this webpage, contribute to the discussion which opens immediately and closes at 9 am Monday 12 September.